According to an industry report, the domestic automobile industry, which is currently the fourth largest in the world, is expected to become the third-largest by 2021. The industry (including component manufacturing) is expected to grow at a compounded annual growth rate of 5.9 per cent and reach USD 251.4-282.8 billion by 2026, thereby becoming the fastest growing industry in the country, as per the report.
The domestic tyre industry has benefited from strong growth in both original equipment (OE) and replacement segments in the ongoing fiscal, according to Icra note.
Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on a quantitative basis. No suggestions are being made to directly go and invest in the top-scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.
Best Tyre companies Quantitative Analysis
Companies selected for Analysis:
We have selected the following Seven Best Tyre companies for our Quantitative Analysis.
Market Capitalization of Best Tyre companies (Rs. Cr):
- Balkrishna Industries- Rs. 43,402
- MRF- Rs. 34,683
- Apollo Tyres- Rs. 14,360
- Ceat- Rs. 5,442
- JK Tyre & Industries- Rs. 3,633
- Goodyear India- Rs. 2,246
- TVS Srichakra – Rs. 1,474
The procedure of Analysis and its Interpretation
- These 5 Companies are analyzed on the following 15 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided with a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
- Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.
- In the end, we have added all the points together and companies are ranked accordingly.
Parameters of Quantitative Analysis:
1. PE Ratio:
- PE of a company means that how much investors should pay for the stock based on their current earnings. A company with a lower PE Ratio is considered to be undervalued and has a huge potential to unlock its value. Hence, full points will be rewarded to that company.
- With the lowest PE Ratio of 13.16, Ceat gets the first position and 7 points. And Balkrishna Industries with the highest PE of 37.56 among peers is awarded 1 point only.
- EV/EBITDA ratio measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation and Amortization (EBITDA). This ratio assesses the overall financial performance of the firm.
- EV/EBITDA of value below 10 is considered healthy.
- Here, Ceat bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 6.97.
- Balkrishna Industries with the highest EV/EBITDA ratio of 22.72 receives the last position and one point only.
3. Return on Capital Employed (ROCE):
- ROCE signifies that how the company is using its capital to generate a return for the company and investors. The high ROCE, the better it is for the company.
- In this parameter, Balkrishna Industries outperforms other peers by scoring the highest ROCE of 23.9% and hence obtains the 1st position as well as 7 points.
- Apollo Tyres get the last position and 7th rank due to the lowest ROCE of 9.7%.
4. Return on Equity (ROE):
- RoE signifies how well the company generates the return on shareholders’ investment. Companies with higher RoE are considered good.
- In this parameter, Balkrishna Industries again beat other peers by scoring the highest ROE of 21.1% and hence obtains the 1st position as well as 7 points.
- Apollo Tyres with the lowest RoE of 6.7% receives the last rank.
5. Debt-to-Equity Ratio:
- The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
- Accordingly, the lesser is the debt, the better it is for the company and vice-versa.
- Goodyear India is nearly a debt-free company and hence rewarded with full points and given the first position.
- MRF has a total D/E of 0.17 and it is ranked 2nd.
- JK Tyre & Industries has the highest D/E ratio of 1.50 and hence given 7th rank.
6. Interest Coverage Ratio:
- The Interest Coverage ratio is in direct relation with the D/E ratio. It can be calculated by dividing EBIT from Interest Expenses.
- This ratio gives the ability of the company to pay interest from its operating profit.
- Balkrishna Industries maintains a good Interest Coverage Ratio of 131.6, the highest among peers, gets the first rank.
- Due to higher debt and the lowest Interest Coverage Ratio of 2.1, JK Tyre & Industries is ranked last and scored accordingly.
7. Pledged %:
- 6 companies in the list have not pledged their share and hence are rewarded with full points and first rank.
- Apollo Tyres have a pledge of 5.01% of its shares, hence, given 7th rank and only 1 point.
8. Institutional Holding (FII + DII):
- Institutional Investors (FII + DII) as a % of Free Float has the highest stake in Ceat, collectively of 76.4% and hence it is rewarded with full points and first rank.
- FIIs and DIIs also hold around 69.5% stake in Balkrishna Industries and hence it secures the 2nd position in this criterion and scores 6 marks.
- JK Tyre & Industries has the lowest stake of institutional investors of 10.9% in the Company’s shareholding pattern and hence is given 1 point only.
9. Operating Profit Margin (%):
- Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
- Balkrishna Industries efficiently post the OPM of 31.4% in March 2021 and secures 1st position, due to its diversified portfolio and favourable revenue mix. Key Factors driving High Margin
- Diversified Product Portfolio (2,700 SKUs) Customised Model: Large Variety Low Volume and Favourable Revenue Mix- 77% Exports: Strong Partnership with Global OEMs and Global Reach: Sales to 160+ Countries
- With the lowest OPM of 11.4%, Ceat scores last rank among its peers.
10. Sales and Net Profit Growth- 5 Year CAGR:
- In terms of Sales Growth, Balkrishna Industries has posted the highest figures with a 12.3% rise in sales and a 21.1% rise in PAT. Hence, it gets the full points and 1st rank.
- Key Drivers of High CAGR vs Peers
- Favourable Revenue Mix- 77% Exports: Strong Global Reach: Sales to 160+ Countries, 64% of Revenue from the Agriculture segment (Non-cyclical sector), 32% from OTR (Off-the-Road segment Industrial, Construction, Mining, which are Cyclical sectors), While for peers only 10-15% Revenue comes from Farm/Agri segment
- MRF has registered the lowest Profit after Tax (PAT) growth on 5 years CAGR basis of negative 4.3%, whereas, TVS Srichakra posted the lowest sales growth of negative 15.8%, hence, got the 7th position.
11.Sales & Net Profit Growth: 3 Year CAGR:
- In terms of Sales Growth, Balkrishna Industries has posted the highest figures with a 9.2% rise in sales and a 17.7% rise in PAT. Hence, it gets the full points and 1st rank.
- JK Tyre & Industries posted the highest rise in PAT with a growth of 65% due to the effect of the low base in FY19.
- Here, TVS Srichakra has registered the lowest sales growth on 3 years CAGR basis of negative 3.4%, as well as posted the lowest Profit after Tax (PAT) growth of negative 14%, hence, got the 7th position.
12. Operating Performance Ratios- Inventory Turnover Ratio (Higher the Better):
- Inventory turnover signifies a parameter that measures how fast the inventory is sold or consumed in the given period, the higher the better.
- Here Goodyear India secured the 1st rank with the highest Inventory turnover of 11.01 and get full 7 points.
- TVS Srichakra again got the last rank due to a poor Inventory turnover ratio of 4.58, hence only 1 point given.
13.Operating Performance Ratios- Cash Conversion Cycle (CCC):
- Again Goodyear India secured the highest rank among its peers with the lowest CCC of 7.96 and get full 7 points.
- Here MRF got the last rank due to the highest CCC of 81.35, hence only 1 point given.
14. Final Score:
- After analyzing and summing up all the marks scored by the Best Tyre companies, Balkrishna Industries is a front runner thereby conquers the first position in our analysis. Balkrishna Industries scores 84, the highest among all 7 companies.
- Ceat and Goodyear India scored 77 points and 76 points respectively and hence secured 2nd and 3rd rank.
- Due to poor performance in the majority of parameters, TVS Srichakra gets the lowest score of 54 points.
- On account of healthy scores, Balkrishna Industries, Ceat and Goodyear India appears to be strong Tyre Companies.